Science and technology

PayPal Wants the Float

Cheques, please

PAYPAL wants the float of a billion cheques. The eBay internet-payment division is no longer content to take same-sized bites from the online-transaction pie, amounting to $817m from $21bn in fees from credit-card and user-to-user payments in the second quarter. Last week, the firm updated its iPhone application to snap pictures of cheques and deposit them into PayPal accounts. The convenience of instant deposit, even if the money is later disbursed to other accounts, must have been alluring. The company reports that in the first day $100,000 in cheques were scanned.

PayPal is the third major financial institution to turn to the iPhone as a way to scan cheques. USAA was the first in August 2009, but that bank has a single branch, 8m customers, and largely serves military personnel who are frequently on deployment. Not all USAA customer meet the qualifications, either. Chase threw its hat in the ring in July for consumers and small businesses with its own app. TV ads show a just-married couple using the bridal bed to scan wedding cheques. Both PayPal and Chase limit their consumer scanning to no more than $3,000 per month and $1,000 per cheque. Clearly, Chase's newlyweds have skinflints for kith and kin.

The interest in snapping pictures of cheques belies their declining use. America's Federal Reserve, which handles a large portion of inter-bank cheque clearing, has seen a drop from 18 billion cheques processed in 1989 to 17 billion a decade later and 8.6 billion last year. The drop hides an increase in a variety kinds of non-cash transactions, including direct deposits and withdrawals—or intra-PayPal money transfers. And the Fed says 99% of the cheques it handles are no longer delivered by air freight and trucks, but are scanned by the receiving financial institutions and sent to the Fed as electronic files. The Check21 law passed in 2004 gave banks great latitude in migrating from shipping and retaining cheques to transferring scans. The monetary authorities once ran 45 regional processing offices. As of March, a single facility in Cleveland handles the remaining paper. (The reduction in paper works even at a micro-scale, as discussed in "Shred before reading".)

But 8.6 billion isn't a number to be sneezed at. Even with current paltry interest rates, float is still float, although PayPal's interests go beyond that. Making it easy to convert a cheque into cash, which can then be used for direct PayPal payments online or via a debit card, could sweep in more customers who then engage in additional fee-bearing transactions with business PayPal users, who are charged fees. PayPal already pockets a large slice of online payments. It needs to make that pie bigger to expand.

By accepting cash in this form, PayPal also puts itself in competition with banks, which the firm is not. In America, PayPal occupies an odd niche as a "money transmitter". It provides an opt-in money-market return on deposits with no guarantees—0.18% last week. Other funds are pooled into FDIC-backed bank accounts at unaffiliated institutions, but the scale and nature of the funds means PayPal can't ensure each deposit is fully insured. Tight credit pushed banks into greater reliance on deposits to meet capital requirements and have funds to loan out. PayPal could siphon off a large aggregate of small amounts.

The use of cheques has tapered off, but paper remittances certainly aren't about to dry up any time soon. At least one generation will need to pass before the habits of cheque writing fade and the familiarity of e-transfers is all anyone remembers. Alas, even with cash replaced by cards and cheques by online transfers, we may still suffer from the malaise described in the introduction to "The Hitchhiker's Guide to the Galaxy":

This planet has—or rather had—a problem, which was this: most of the people living on it were unhappy for pretty much all of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn't the small green pieces of paper that were unhappy.

The Book: It is important to note that suddenly, and against all probability, a Sperm Whale had been called into existence, several miles above the surface of an alien planet and since this is not a naturally tenable position for a whale, this innocent creature had very little time to come to terms with its identity. This is what it thought, as it fell:

The Whale: Ahhh! Woooh! What's happening? Who am I? Why am I here? What's my purpose in life? What do I mean by who am I? Okay okay, calm down calm down get a grip now. Ooh, this is an interesting sensation. What is it? Its a sort of tingling in my... well I suppose I better start finding names for things. Lets call it a... tail! Yeah! Tail! And hey, what's this roaring sound, whooshing past what I'm suddenly gonna call my head? Wind! Is that a good name? It'll do. Yeah, this is really exciting. I'm dizzy with anticipation! Or is it the wind? There's an awful lot of that now isn't it? And what's this thing coming toward me very fast? So big and flat and round, it needs a big wide sounding name like 'Ow', 'Ownge', 'Round', 'Ground'! That's it! Ground! Ha! I wonder if it'll be friends with me? Hello Ground!
[dies]

The Book: Curiously the only thing that went through the mind of the bowl of petunias, as it fell, was, 'Oh no, not again.' Many people have speculated that if we knew exactly *why* the bowl of petunias had thought that we would know a lot more about the nature of the universe than we do now.

@jamesyar: I was required to write a check (in America) this morning to a contractor who, while capable of receiving electronic payment, preferred the old-fashioned method. Fortunately, one he deposits it, I'll be informed electronically and never see that particular piece of paper again.

I only descovered British Satire in my later years as I live in AZ. :^( I imagine it's kinda like Guiness. I loved Guiness in America and then I had it in the UK. When I returned to America Guiness no longer tasted as it should :^(.

Seriously, who in their right mind would choose to deposit a check (are people still using checks?) directly into their PayPal account? Surely, an extremely risky and unnecessary intermediate step for the collecting of funds from a cheque.

Draft Media Release re PayPal

“It is with great sadness that eBay’s Chief Headless Turkey, John Donahoe, announces the probable demise of eBay’s most ugly daughter, PayPal. Donahoe says that PayPal is likely to be stricken by particularly virulent strains of Visa+CyberSource and Mastercard Open Platform, and these afflictions are greatly aggravated by PayPal’s insurmountable lack of direct financial institutions support and a great deal of PayPal user dissatisfaction, particularly with respect to PayPal’s grossly unfair, “all responsibility avoiding” user agreement, totally primitive risk management processes, and grossly unprofessional, usually buyer-biased, fraud-facilitating (indeed, non existent) transactions mediation, to name just a few of the problems that PayPal merchants have to endure.

“Donahoe says that PayPal’s health may therefore be expected to deteriorate and, if ultimately not completely incapacitated, will most likely be eventually confined to its mandatory offering on what little there will be, by then, left of the Donahoe-devastated eBay marketplaces. There is no cure for this condition, and the “eBafia Don” is particularly saddened by the inevitable presumption that it is unlikely that PayPal, will be able to continue to underpin eBay’s sagging bottom line too far into the future.”

Yes, it’s a send-up but, still, it accurately describes PayPal’s most unprofessional and “clunky” operation. The fact is, had the developers of the original “bankcard” concept ever behaved the way PayPal behaves towards its payees in particular, credit/debit cards may never have gotten off the ground, and we would probably still be paying for all our purchases with bits of paper and little metal discs.

It should also be emphasized that all the payments processors that do not have the direct underlying support of the financial institutions, as do Visa/Mastercard, suffer the same handicaps that PayPal suffers. The “banks” may be disliked by some but they at least supply a “professional” payments processing service.

Checks were great for their time, but debit is the future so long as every other bank doesn't jump on board with Bank of America's recent debit fee. I mean really, why should banks be allowed to make so much money off of something that literally might cost a fraction of a cent. I was never charged for check cashing, so why should small businesses get hit with credit card processing and debit swipe fees? And now that legislation has been passed preventing those fees from being passed on to the consumer, they now do it indirectly. Time to drop the big banks, America and get hip with your local, friendly credit union.